Having done business in China for more than 20 years, I've been following the Evergrande case closely. Hui Ka Yan was sentenced to life on Thursday, along with 56 other executives.
Two years of overstatement is not a year-end entry
The number that stays with me isn't the sentence. In 2020 Evergrande overstated revenue by 69%, and reported a profit of 31.4 billion yuan in a year it actually lost 19.9 billion. The year before that, revenue was overstated by 45%. The mechanism was recognizing property sales before the buildings were finished and handed over.
Recognizing sales before completion at that scale is not a year-end entry made by a few people. It had to be repeated across projects and sites for years.
So how did nobody inside the organization challenge it?
In my experience, information does not automatically travel upward in Chinese companies. Hierarchy, personal relationships and the importance of avoiding loss of face can make challenging a superior extremely difficult. Going over your boss's head to foreign headquarters can be seen as disloyalty, create serious pressure from the local chain of command and effectively end a career.
A hotline on its own is not a control
That is why a hotline alone is not a control, whatever the policy says. The test is whether someone can tell the truth without becoming "the person who told the truth."
None of this is only a China problem. Years ago I took over a business elsewhere in Asia where nobody would tell me anything either. The person who eventually did was my own assistant, and she only did it after I told her I wasn't replacing her, which is what every incoming manager does. What she gave me wasn't a report or a complaint. It was a suggestion about where to look. After that I stopped asking people to come forward, and started asking questions I already half knew the answer to, so that nobody had to be the one who volunteered anything.